Out-Law Analysis 8 min. read
25 Sep 2023, 1:11 pm
For several years, many industrial players have shown a high level of interest in carbon-free and low-carbon hydrogen.
These technologies are viewed as an opportunity to decarbonise industrial sectors such as transportation and fertiliser production. Potential consumers are eager to use carbon-free or low-carbon hydrogen. France, for example, uses 900,000 tons of hydrogen, most of which is carbon-intensive, resulting in the emission of around 9,000,000 tonnes of CO2 every year.
Driven by a desire to lead the industrial transition and recognising it as a lever for reducing CO2 emissions more generally, in 2019 France set a low-carbon and renewable hydrogen production target, representing 20% to 40% of total hydrogen consumption, especially in industry and transport, by 2030. By the end of 2021, the government announced an objective of installing 6.5 gigawatts (GW) of electrolysers by 2030. This goal is ambitious compared to Germany’s 5GW target by the same deadline, but is conservative in comparison to the UK’s 10GW target.
In practice the French government had committed to an investment plan of €7 billion over 10 years to support low-carbon hydrogen, with €4bn of subsidies awarded following calls for tenders for projects, as confirmed by the minister for energy transition at the end of August. The French government has identified an overall potential capacity of around 1GW by 2026, with the allocation of 150 megawatts (MW) in 2024, 200MW in 2025, and 600MW in 2026. It is hoped that this initial allocation will trigger strong and sustainable growth in this field.
Further up the supply chain, low-carbon or decarbonised hydrogen producers have long awaited concrete measures from regulatory authorities to implement these positive signals as incentives for deploying production units. While some actors like Lhyfe or Hynamics have managed to develop pilot units locally in France and abroad, the widespread deployment of carbon-free hydrogen at the national level somewhat depends on the implementation of incentivising public policies. The publication of Decree No. 2023-854, regarding support for the production of certain categories of hydrogen earlier this month, and the forthcoming introduction of support mechanisms through calls for projects – as has already been done for wind and solar power – should be a significant step in this direction.
Before exploring the potential users of this so-called carbon-free hydrogen, especially in transportation, it is crucial to determine not the colour but the method of production. While hydrogen terminology used to be associated with a colour palette, Ordinance No. 2021-167 of February 2021 added a definition of hydrogen and its production methods to the French Energy Code. Preferring textual definitions over colours, hydrogen commonly referred to as "green" is defined as primarily obtained through electrolysis or using electricity from renewable energy sources. Hydrogen obtained through a production process that generates CO2 emissions below a certain threshold is labelled as “low carbon”. In practice, this corresponds to hydrogen produced using nuclear power, sometimes referred to as "yellow" or "pink" hydrogen.
A new colour has recently emerged in France with the discovery of hydrogen deposits naturally located underground in the Lorraine region. These reservoirs do not require any industrial transformation process and are sometimes referred to as "native" hydrogen or "white" hydrogen. It is expected to develop alongside the legal provisions of the French Energy Code, which pertains to hydrogen produced through human intervention, meaning after the implementation of an industrial process.
With the implementation of Ordinance No. 2021-167, a promise was made: the enforcement of a support scheme for the production of carbon-free, renewable, or low-carbon hydrogen through water electrolysis. The scheme aims to provide benefits to carbon-free, renewable, or low-carbon hydrogen production units located in France, either through operating aid or investment aid. The ordinance, now codified in the Energy Code, entrusted a decree with the task of defining the competitive procedures for awarding these subsidies.
More than two years after the implementation of this commitment, the State conducted a public consultation from May 31 to July 3, 2023, regarding the draft decree issued in accordance with Ordinance No. 2021-167, establishing the procedure for awarding "subsidies" for the production of decarbonised hydrogen. During this consultation, 34 observations were submitted, demonstrating the interest in this draft decree. Exactly two months after the conclusion of this consultation, Decree No. 2023-854 was published in the Official Gazette, establishing a new project funding mechanism benefiting low-carbon and decarbonised hydrogen production.
Several takeaways can already be gleaned from this decree. First and foremost, patience is the mother of virtue, as the state took more than two years to conduct a consultation on the draft decree and, therefore, more than two years to adopt it. It took considerable patience to outline the initial framework of this competitive procedure for awarding assistance to low-carbon or decarbonised hydrogen production. Such a wait remains noteworthy, despite the complexity, as acknowledged by the state during the public consultation, in developing a competitive procedure for an industry that had not previously experienced one.
This time lag is even more pronounced given that the state now has significant experience from the initial allocations, following competitive bidding, of feed-in tariffs and complementary remuneration mechanisms for wind and solar technologies. The importance of a "swift" publication of the decree had also been emphasized during the public consultation on the project, confirming the expectations of the industry stakeholders. Furthermore, the publication of the decree is closely followed by the launch of the European Hydrogen Bank, endowed with a budget of €3bn, of which €800 million will be allocated through European tenders, starting in the autumn of 2023.
The terms of the consultation were also significant. It dealt with the allocation of "subsidies", reminding us, if necessary, that the hydrogen production projects supported are projects of general interest. This term is not retained in Decree No. 2023-854, which prefers the more neutral term "support mechanism." The consultation also made a general reference to "decarbonised" hydrogen production, thus encompassing renewable hydrogen and low-carbon hydrogen under a broad term, whereas the ordinance distinguishes between these two production modes.
During the consultation, it was already apparent that there was a broad interpretation suggesting that hydrogen, as defined by law as either low-carbon or renewable, would be referred to in the implementing decree simply as "decarbonised." This interpretation was also confirmed by the state during the public consultation on the draft decree, stating that decarbonised hydrogen includes hydrogen that is "both low-carbon and renewable." While the law made a distinction, the consultation took a more generalised approach. Decree No. 2023-854 also did not retain this broad term, thereby avoiding the use of potentially confusing catch-all terms between low-carbon hydrogen and decarbonised hydrogen.
The procedures for conducting competitive bidding also provide valuable insights. Firstly, it is noted that the procedure will be conducted by the French Environment and Energy Management Agency (ADEME) and not by the Energy Regulatory Commission (CRE). However, the decree does provide for prior consultation with the CRE on the consultation document, which has one month to provide its opinion on it. The CRE's experience gained from competitive bidding procedures in renewable energy will undoubtedly provide valuable support for the successful execution of calls for projects for low-carbon or decarbonized hydrogen.
For example, the call for applications is published in the Official Journal of the European Union, a direct result of a recommendation from the CRE. Once the CRE's opinion on the consultation document is obtained, the call for projects can then be opened. The regulatory authority has opted for a procedure that will be carried out either in two stages, involving a selection phase followed by a designation phase, or in three steps with the addition of an intermediate stage of competitive dialogue during which the contents of the specifications are established in collaboration with selected candidates.
This procedural choice implies, on one hand, that there will be a filtering of eligible candidates during the initial selection phase, and, on the other hand, that it is not expected for the contents of the specifications to be finalized at the start of the procedure. In fact, whether a two-phase invitation to tender or a competitive dialogue procedure is used, the specifications are "drafted" at the time of the designation phase. Competitive dialogue is essentially used to obtain the selected candidates' analysis of its content. This procedure is reminiscent of the existing competitive dialogue used for offshore wind farm tenders, whose purpose is to define or develop solutions to meet needs.
Consulted on the draft decree, the CRE, in a deliberation dated March 23, 2023, criticised the possibility of using competitive dialogue, considering, in light of the observed delays for offshore wind, that such a procedure "is likely to significantly extend the candidate selection process." The CRE's recommendation on this point was not followed, which seems understandable from a technical perspective, given the unprecedented nature of the procedure for the hydrogen industry. However, from a scheduling standpoint, it is true that conducting a competitive dialogue could potentially lengthen a selection process that can already last up to 11 months if conducted in two stages - without competitive dialogue.
On the substance, with the possibility of using competitive dialogue, the government is therefore calling on players to help it define needs and solutions, confirming the innovative and unprecedented nature of competitive bidding for this industry. In terms of support for hydrogen production, for example, we can expect the dialogue to identify the sectors that can be decarbonised, the multiple uses to be encouraged, and the ways in which hydrogen can be used in these sectors. The decree thus stipulates that the uses to which hydrogen can be allocated are defined during the competitive dialogue if the state decides to conduct one.
Aside from filtering during the applicant selection phase, the specifications to be drawn up should also restrict applications to those applicants who have already made progress in developing their project, for example, in terms of having already secured their land rights, obtaining administrative authorisations, or securing the first contractual elements relating to the installation's connection. It should also be added that the specifications to be drawn up by the French government will specify the uses to which hydrogen may be dedicated. The choice of the verb "may" indicate that a candidate proposing other uses would not be excluded from the procedure for this reason alone.
During the public consultation, the state indicated its intention to promote the pooling of uses for the hydrogen produced, to serve several industries, rather than a single use. No doubt, in the event of multiple uses, the procedures for distributing the hydrogen produced by each awardee will have to be rigorously defined. Other challenges will also arise, such as prioritising uses in the event of reduced availability. The publication of Decree No. 2023-854 for supporting low-carbon or decarbonised hydrogen production was eagerly awaited by hydrogen industry stakeholders, and it has now been accomplished. The rapid implementation of project calls is now anticipated to facilitate the deployment of these production capacities, which are also eagerly awaited by potential industrial consumers.
Several challenges remain to be addressed, including the timeline for consultation on the specifications and the intensity of the tenders once they are established. The terms of allocation and prioritisation of uses for multiple-use productions will also be of importance. The submission of all candidates, regardless of the capacity of their projects, to a single tender without capacity distinctions will also present challenges. Considering the different sizes of producers, production methods, the quantities they can produce, and the diversity of cost structures will be particularly complex in determining the ranking of candidates. It would have been desirable to divide the project calls into multiple capacity categories, as it would likely enable a greater number of participants to apply and compete more effectively against peers of similar size. Adjustments may be decided upon later if difficulties are indeed observed.
Co-written by Charles Bressant of Pinsent Masons.